The S&P Report: From Due Diligence to Due Deference

THE S&P REPORT: FROM DUE DILIGENCE TO DUE DEFERENCE

May 1, 2011

Dear Citizens and Elected Officials:

Introduction
On Monday, April 18th, Standard and Poor’s, Inc., a ratings firm, lowered the outlook on the United States’ credit standing to “negative” from “stable,” without lowering our AAA/A-1+ rating, the highest possible, which we share with the U.K., France, Germany, and Canada.

This is a cheeky message indeed from an deeply impaired messenger whose terrible performance in assigning “AAA” ratings to the toxic mortgage backed derivatives in the run-up to the financial crisis was not mentioned in the lead story in the New York Times the next day, by Christine Hauser here at http://www.nytimes.com/2011/04/19/business/19markets.html?scp=1&sq=Wall%... In fact, the only dissenting voice in the article came from none other than President Obama’s chairman of the Council of Economic Advisors Austan Goolsbee, who said that “S&P’s ‘political judgement’ should not be given ‘too much weight.’” Goolsbee got that right, but it’s more than a matter of politics; it’s a deeper matter of political economy, as we will soon see.

This was not the first warning from the ratings firms. We located a NY Times’ clipping from January of this year, which appeared the day after January 13th statements from both Standard and Poor’s and Moody’s Investors Service (considered by many to be the “senior statesman” firm, if such a thing is still conceivable for any ratings firm). The warning was only from the first page of the business section, but headlined “Moody’s and S& P. Warn of reducing the U. S. Credit Rating,” and it followed an earlier December 2010 cautionary statement by Moody’s. But what caught our attention was the very explicit statement about what type of political economy the raters believe in, the world view that stands behind the elevation of federal debt and deficits to the rank of our most pressing economic problem. Here’s Steven Hess, one of the Moody’s report’s authors: “ ‘The U. S. is going in exactly the opposite direction from fiscal consolidation…in fact, they are going for more stimulus to the economy…’” and by that he meant the effects of reducing the social security payroll deductions and the extension of the Bush tax cuts reached in the December “compromise.” The article did give voice to different views – that “many economists say the reckoning, if it comes, is still years or even decades away...” and others who agree with eventual deficit reduction but who now say it “is not the time to cut federal spending drastically, given the weakness in the economy and high unemployment.” But like this April’s article, the dissenters were not named, but two prominent deficit hawks were, the old favorites Peter G. Peterson and David M. Walker, the former U.S. comptroller general, who “criticized the ratings agencies for underplaying the threat.” Yet the bond market shrugged it off back then, just as it did with the April 18th “outlook” change.

If the week of April 18th was not one full of religious significance, and the nation not so edgy about violent metaphors, we might be tempted to just say: “shoot this messenger,” but then again, S & P, and the other ratings agencies, are already intellectually full of holes.

Their Problems Are Our Problems
To see how they got that way, we’re going to take a deeper, longer look at the ratings agencies, because their problems are our problems and reflect the broader imbalances in our society: citizens outranked in Washington by private economic power; governmental authority outranked by the private sector’s; regulatory agencies outranked also, and logically, cowed by the private sector. But in theory at least, the economic position of the rating’s agencies would have to mean they have the highest authority of all, wouldn’t it? By rating corporate debt and the overall health of companies, and their additional ability to rate public debt emanating from all levels of federalism, and the health of even the United States’ national economy – they have the power to break governments, as Thomas Friedman famously declared in 1996. But folks, that isn’t the reality at all, and so we going to take a shot at clarifying things so that you can put the grand warning in a clearer perspective.

To start with, on the same day the print addition’s front page was solemnifying the S& P pronouncement, the online NY Times readers were given a much broader range of views in the irreverently entitled “Is anyone listening to the S & P?” article, which appeared later that Monday here at http://www.nytimes.com/roomfordebate/2011/04/18/is-anyone-listening-to-t...

This regular “Room for Debate” feature gave eight economists (six known to us) a chance to comment. Several had no trouble at all in quickly putting S&P out of its misery: Barry Eichengreen: “‘The ratings agencies don’t know anything more than people who have read newspapers covering this issue. They don’t influence market sentiment as much as they reflect it’”; Yves Smith: “‘The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer. The Standard and Poor’s rating firm should be embarrassed…But given its record with mortgage securities and collateralized debt obligations why should we be surprised to see a rating agency relying on conventional assumptions rather than analysis’”; Barry Ritzholtz: “‘…I have stopped paying any attention to anything that S & P says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder.’” As we said, many commentators already consider raters full of holes.

We liked L. Randall Wray’s analysis the best (his is highlighted in our link), and noticed that he and two others (Yves Smith and Mark Thoma) called attention to the Japanese experience with two ratings’ agency downgrades earlier this decade – from Moody’s and S & P, which did not result in a rise in interest rates. Yves Smith ominously points out that Japan’s stop-and-start fiscal stimulus led to “protracted near-term deflation,” not a rise in interest rates, commenting that this appears to be the current pattern in the U.K., Ireland and Latvia.

We tried to point this out last September 4th , in our essay Election Menu: Ran Out of Jobs, Now Serving Austerity, by providing a link to a speech given by Professor Richard Koo, the chief Economist at the Nomura Research Institute, which advises the famous Japanese securities firm, Nomura Securities. Professor Koo had a ringside seat advising the Japanese government after the nation’s 1989-1990 real estate-stock market collapse. We wrote that the heart of Koo’s message was this: “for 15 years Japan zigzagged between the right remedy – Keynesian deficit spending for public works and work – and recurring bouts of elected officials’ budget balancing and austerity obsessions…So a recovery that should have taken ‘just’ eight years …ended up taking 15 years…” When we went to the Institute for New Economic Thinking’s website to locate Koo’s talk again, we learned that he had testified in front of a U.S. congressional committee in July of 2010. Koo said then that the G-20’s proposition to halve deficits by 2013 is ill-advised, and that ‘consolidation must wait until it is certain the private sector has vanished deleveraging and is healthy enough to borrow and spend the savings left unborrowed as a result of the government’s austerity measures.’” Here are both links at
http://ineteconomics.org/blog/how-avoid-third-depression-richard-koo%E2%... .

And Koo hasn’t changed his mind since then. Here’s a link to his caustic comments in the wake of the S & P report at http://www.businessinsider.com/sp-downgrade-us-outlook-negative-2011-4

The Three Levels of Audacity
There is more than a touch of audacity, and arrogance, in at least three aspects of S&P’s report. First, they not only made massive misjudgements in their ratings over the past four years, they’ve been making them for decades now. And there is irony and more than a bit of tragedy in this for us all because the “insider judgements” by the financial system’s pecking order, such as it is, don’t seem to place them anywhere near the top – despite their key function - to rate the products and performances of parts crucial to that entire sytem: not only debt ratings, but firms and nations alike. If that sounds like the arrangements for a “world turned upside down” to you, you have a good ear.

Second, as suggested by Professor Koo, their national debt ratings’judgements flow from a very conservative view of the political economy. Can you imagine them issuing, instead of what they did on April 18th, a warning of future poor national economic performance based on our failure to restore full employment or to adequately deal with the foreclosure crisis and the continued colllaspe of the US housing market, or to have an adequate plan to close the nation’s great trade imbalance, the one that Professor James Galbraith insists will lead, by macro-economic accounting conventions as well as other realities – to running a guaranteed deficit, of either the private or public sector, take your pick. The S&P worldview all rests on the bedrock assumption that the private sector is now healthy, ready to create jobs, and all the federal government needs to do is shrink back to the shrivelled role that conservatives dream for it, just strong enough to nurture the most predatory parts of the private sector (of which there are plenty) while squeezing the leftovers for the less influential segments of the citizenry. Now the rationale for deficit reduction and more tax cuts in current bi-partisan rhetoric is always to create jobs and increase employment levels; yet these two goals are, in reality, minor concerns for “healthy businesses”; they might happen, after many other factors focused on efficiency and profitability are given priority – and after the strong tax tilt towards overseas developing markets is given its substantial due.

And finally, there is that audacity of timing, the release the day before Passover and at the start of a week culminating in Easter, a week that many average citizens also use for vacations to catch a break from the great race…not exactly a sense of timing aimed to give equal footing to critics and dissenters…And we have to mention that the S&P report followed less than a week upon the release of the second major accounting of the Great Financial crisis, this time from the Senate Permanent Subcommittee on Investigations, chaired by Democratic Senator Carl Levin and co-authored by Republican Senator Tom Coburn, M.D., the ranking minority member, some 650 pages long, and carrying a April 13, 2011 date on its cover. Although the title was Wall Street and the Finanical Crisis: Anatomy of a Financial Collapse, and some of the early press coverage focused on its pummelling of Goldman Sachs, we thought you ought to know that Section V’s topic was “Inflated Credit Ratings: Case Study of Moody’s and Standard & Poor’s, from pages 243-317.” Some news sources considered it powerful enough to headline that “Credit Raters Triggered Financial Crisis- US Panel,” although we wouldn’t go quite that far (from Reuters April 14, 2011, which we found at the Advancedtrading.com website).

The Senate Report makes for some very interesting reading, especially as to when the two raters knew that the housing market and the shaky and fraudulent mortgages it was built upon were in trouble, and how long it took them to get around to breaking the news to the rest of the investing world in July of 2007, followed by the first wave of what became a vast flood of RMBS and CDO credit downgrades.

A Ratings Retrospective
Since the ratings agencies now seem inclined to directly intervene into broadly based matters of political economy – which they certainly have a right to do, as do regular US citizens (and when they get sued for misratings they plead First Amendment: we’re entitled to our opinions) – they have also inadvertantly invited us all for a little journey to our collective economic memory. That memory is stored in select, but enlightening places, like Frank Partnoy’s detailed compendium on how we got to our present financial mess, decade by decade, and derivative deception by deception, in his Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, first published in 2003 and updated in our paperback edition in 2009.

Now both Moody’s and S&P have their roots in rating railroad bonds from the early and glory days of rail, with the “Poor” part of S&P going all the way back to 1860, and Moody’s to 1909. But Professor Partnoy tells us the ratings agencies really didn’t become the institutional economic forces they did until the 1970’s when regulatory agencies, especially the SEC, began to tie “legal rules to ratings,” and created, in 1975, the three Nationally Recognized Statistical Rating Organizations (NRSRO’s – there are now ten but you probably haven’t heard the names of the other seven). Their formal powers were enhanced by regulation after regulation which required certain financial entities to invest almost entirely in “investment-grade” securities, with a bright line being drawn at the “BBB” designation, signalling the last of the good, and the safe, before a descent into the shakier world of higher risk, culminating in that awful place called “junk bond” station.

Readers who have been doing their political economy homework will by now realize that the the rise of the raters in the 1970’s was no coincidence; this decade was a time of economic shocks, and the financial world, unmoored by the US abandonment of the gold standard and the consequently freely floating world currencies, was searching for safe harbors. Decade by decade the power of nation states fell and that of the globalized financial markets rose, until one day, late in the 1990’s we realized that we were all One Market Under God (as Thomas Frank put it in 2000), with the ratings agencies standing right next to the pearly gates, ready to wave us in – or away. Partnoy supplies us with the semi-official pronouncement of awe at these developments, quoting – who else - Thomas Friedman’s 1996 declaration that “ ‘there are two superpowers in the world today ... There’s the United States and there’s Moody’s bond rating service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds.’” (My, how the mightly have fallen since then.)

Yet Friedman was already, by 1996, two years behind the growing reality: the raters, the alleged gatekeepers, were already lagging (in technical “mastery”) the mathematically driven mysteries of the derivatives being cooked up by the geniuses on Wall Street. And they were now increasingly dependent on their customers for the substantial fees they collected for rating the new financial instruments, whether that was Wall Street or for the bond issuances of a local, county or state government – like Orange County in California in the 1990’s. (In the 1920’s they had charged for their services by subscriptions to investors, what the Levin- Coburn Report calls “subscriber-pays” but they lost credibility with their poor record during the 1929 crash, and did not come up with the current “issuer-pays” model until 1970 {Page 247 in the Report.})

The 1990’s: Drunk on Structured Notes
The bankruptcy of Orange County, California in December of 1994, a county which was famous for being a Republican Right seedbed, was an early warning signal for the dangers of financial derivatives, especially a form – “structured notes” – which became, in the first half of the 1990’s, that decade’s equivalent of the mortgage-backed securities and CDOs of the 21st century. Instead of raising money from plain old fixed interest rate bonds from a corporate or governmental issuer, with coupon/interest payments at predictable intervals and full return of principal at the specified termination date, several investment banks came up with notes/bonds with much higher rates of return – some over 10% interest - when the ordinary others were paying half that. But in exchange for those higher rates there was not only interest rate risk but principal risk based on the movements of – well – usually some index interest rate or currency which was complexly programmed into the banks’ proprietary formulas – in what one early practioner called “infinite” variations. Structured notes became an almost manical trend wave starting in the 1990’s, with a broad range of public and private entities buying them: “mutual funds, insurance companies, pension funds and corporations”; and some very surprising entities issuing them: the Federal Home Loan Bank (“…the 700-pound gorilla, issuing tens of billions of dollars …”); Fannie Mae, Fedddie Mac, Sallie Mae, and the World Bank. “The most active corporate issuers…included new financial subsidiaries of many industrial companies, such as General Electric, IBM, and Toyota…DuPont Co. issued more than $1 billion …during the early 1990’s.”

The claim was that the structured notes lowered the cost of corporate borrowing by a half percent or more, and the banks who sold them were deeply engaged in hedging the risks for the issuers. That helped them to stop worrying about those note payments “linked to a complex formula involving interest rates or currencies – or some other wild bet…” like the huge number of Thai Baht Basket-Linked Notes issued by the Credit Suisse Financial Products (CSFP) firm, which were tied to the (then) narrow fluctuation range of the Thai currency which in turn was allegedly linked to a basket of three other major currencies. Almost needless to say, fine print land-mines could be added by the investment bank designers: penalties, collateral postings and other interest rate or currency change markers and “ratings triggers” which would make the deal much better for the issuer if things went south from the directional bet – and much worse for the unsophisticated investor who bought them, like “the elderly treasurer of otherwise-conservative Orange County, California…” a Democrat who also ran their investment operation, Robert Citron. (Quotes are from Chapter Three of Partnoy’s Infectious Greed.). { Editor’s Note: Yet despite all the background Partnoy has given, it was still not clear to us how an issuer paid the higher interest rates to the investor and still cut their own borrowing rates, since they were paying higher fees to the inventors of the models behind the notes who were usually also the sellers of the offerings…but then again, we have just a little of the Steven Eisman “explain that again” in us, which is what sparked our original skeptical interest in derivatives.}

Hitting That “AAA” Note
Now one of the many fascinating trends that Partnoy lays out for us about structured notes is the role that the ratings agencies played in giving that all important “AAA” stamp of approval to both the institution issuing the structured note and the note/bond itself. It’s a complex story because it touches upon the old and strict Glass-Steagall boundary from the New Deal separating investment banking from commercial banking, because the investment banks, like First Boston which was one of the pioneers in the notes, could only get a single “A” rating, not good enough for broadening the future pool of customers. That’s why they teamed up in a new joint venture with a “AAA” rated commercial bank, Credit Suisse, to produce the CSFP operation headed by Allen Wheat, a firm which, based in London, pointed in the direction of future Special Investment Vehicles (SIVs) and Special Purpose Entities (SPEs), which became very skilled in keeping risky derivative operations off the parent companies’ books and helping “create a deal that wasn’t taxable or that aovided disclosure rquirements. The SPE could be domiciled in a tax and regualtory haven – Caymen, Jersey, Labuan…” (Page 247.) Not only did CSFP end up with a “AAA” rating itself, so did its exotic structured note products, including those Thai Baht Basket-Linked Notes.

Given these soothing signals from the ratings companies, and keeping in mind the background political economy in Orange County and California in general - the great anti-tax revolt – which meant that now local governments were increasingly playing the private sector investing game in an attempt to fund services through success in the markets, rather than success in raising tax revenue – enter one rather unsophisticated Robert Citron, who has had a long record of achievement in managing Orange County’s investment funds heading into the new products of the early 1990’s, like structured notes. Citron isn’t only investing in these notes being designed and marketed by banks like Merrill Lynch, and issued by federal government agencies like the Federal Home Loan Bank; he’s also borrowing heavily from the banks ($13 billion) to make his bets, bets worth $20 billion which end up succeeding or failing based on the direction of federal interest rates. He’s betting they stay low – at exactly the time Alan Greenspan is about to embark on a 2 percentage point plus increase in rates (in just one year) starting on February 4th of 1994.

Interest Rate Bets: Going My Way?
Citron has made a major misread of the political economy of the conservative era; the great concern is not jobs and full employment but controlling inflation – just ask George Bush the First about that after his 1988 election loss based on – can we say it in 2011? – “insufficient stimulus” for the stagnant economy. And controlling inflation in turn depends on changes in interest rates initiated by the Federal Reserve, but now these attempts to influence longer term rates by the short term federal interest levers are losing leverage in the more difficult globalized markets, making wagers on interest rate directions anywhere a much more problematic venture. So Robert Citron has to shoulder his share of the blame for becoming a gambler-investor in what should have been a very conservative fiduciary role, but one that instead ended in the largest local government bankruptcy in American history – until the troubles of Jefferson County, Alabama in the 21st century. Merrill Lynch comes in for a good part of the blame, despite parts of the firm having issued Citron warnings about the interest rate bets, as did Goldman Sachs, who “refused to sell him any structured notes.” (Yes, that’s right; this was a slightly different Goldman Sachs back then.) Merrill Lynch and other banks are, however, also the bond underwriters for Orange County, and “the public disclosures related to those bond issues did not mention Citron’s risky interst-rate bets.”

When A Black Widow Bites an Orange County
But perhaps Professor Partnoy is a bit too even-handed. A post-litigation, denouement
story in the NY Times from July, 1998 was too enticing in its details to pass over without comment. Of course Merrill Lynch (ML) was sued by Orange County and some of its constituent municipalities, as well as by the SEC. ML’s total settlements came to $470,000,000, if we did the math right. But the real Faustian figure in the story is that of ML’s #1 worldwide salesman, who rode his relationship with Robert Citron to that perch, being the star of a company training film in 1992 where he “exhorts young Merrill brokers to become a ‘master of the universe,’ just like him, and coaching them that to succeed they will “‘need the tenacity of a rattlesnake, the heart of a black widow spider and the hide of an alligator.’” Sometimes, you can’t make up more self-indicting words to put in Wall Street bond salemans’ mouths, as the lawyers for Orange County realized by making this tape one of their “prominent exhibits.” This is 17 years ahead of Matt Taibbi’s “giant vampire squid” metaphor for Goldman Sachs. And other truths emerge in 1998: “A 1993 memo from Edson V. Mitchell and Willam S. Broeksmit, two Merrill exectives no longer with the firm…warned Merrill management of ‘potential adverse consequences for Orange County in the event of a substantial increase in interest rates and the flight of hot money’ from the county’ investment pool.” (Our emphasis: have you noticed how often the whistle blowers inside firms don’t “stay?” See the Financial Crisis Inquiry Commission’s opening chapters for more confirmation…) In another taped conversation used in the trial by Orange County, this one from late 1992, “Mr. Citron…says he had already been called by a Merrill executive, saying ‘hey, we’ve got a legal problem here that Merrill Lynch has this great liability if something happens like, uh San Jose or West Virginia, and we want to protect ourselves, O.K.?’” Here at
http://www.nytimes.com/1998/07/22/business/the-master-of-orange-county-a... (Editor’s Note: the references to
San Jose and West Virginia were two earlier instances of Wall Street-marketed derivatives products gone sour when sold to governments. Matt Taibbi’s list from his Spring of 2010 article, “The Real Reason America’s Cities and Towns are Broke,” includes: “The Delaware River Port Authority, the Pennsylvania school system, the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and nearly 500 other municpalities in Italy, the country of Greece and God knows who else,” although most of the article is about the disaster in Jefferson County, Alabama, where JP Morgan Chase, not Merrill Lynch had the “starring” legal role. Here at http://www.rollingstone.com/politics/news/looting-main-street-20100331 )

The Indictments
But there were apparently no such warning calls from the ratings agencies, and Frank Partnoy is perhaps toughest on them, after Citron himself. Here are the charges:

First, they had given AAA ratings to the structured notes Orange County bought, even though the market risks of those notes were much greater than those of more typical AAA-rated investments. .. Second, both Standard and Poor’s and Moody’s gave Orange County itself their highest ratings through December 1994, when the county filed for bankruptcy. These high ratings gave confidence not only to Orange County residents, but also to investors in the county’s bonds…the ratings agencies collected substantial fees for rating Orange County’s bonds (S&P made more than $100,00 from Orange County in 1994 alone.) They collected even greater fees for rating structured notes. These fees raised questions about whether the agencies had been objective in assesing Orange County’s risk. More than six months before Orange County’s bankruptcy the agencies had learned about Citron’s losses on structued notes, but they kept this information secret, and didn’t adjust their ratings in response…The agencies finally downgraded Orange County during the second week of December 1994, as the county was preparing to file for bankruptcy…Robert Froelich, director of bond research at Van Kampen Merritt, said, ‘if ratings agencies can’t kep track of one of the largest counties in the U.S. what is the value of their ratings on other counties?’ Or, he might have said, other companies? (Infectious Greed, Pages 116-117.)

Or, as we will now see in another ratings saga with a tragic ending, he might have said other countries, like Thailand in 1997, just three years after the Orange county debacle. We have already mentioned the use of the Thai (the baht) currency’s trading range as a reference point in many structured note offerings, and the carry trade that rose in a number of East Asian countries, a trade made possible by our relatively low domestic rates and their high ones, sometimes approaching 15 percent. Just as with China today, there was a lot of currency manipulation going on in Asia, (propping up their values as opposed to dampening down China’s) and something else too: a vast sea of what was called, somewhat self-righteously by commentators in the West, in light of recent events, “crony capitalism.” Partnoy explains that “in Indoneisa, the Philippines , and Thailand, ten families controlled half of the corporate sector…Not surprisingly, managers at these firms didn’t always tell investors the truth about their investments…it was an ugly picture, and yet money continued to flow in…” (Page 245.) It flowed in thanks to the influential powers of investment banks, hedge funds and the seemingly practical allure of the carry trade, and the momentum that builds from the psychology of bubbles. And the studied obliviousness of the ratings agencies.

Those who really understood the precariousness of the situation in Asia, and especially in Thailand, started to pull out in the spring of 1997, based on rumors of rising indebtedness. But the major U.S. banks weren’t among the alert ones, and Partnoy says they “continued to sell investors derivatives linked to the Thai baht, using SPEs.” As financial maneuvers at the Bank of Thailand became increasingly desperate in attempts to prop up the currency, reaching for more and more exotic derivative positions, the baht was ready for a sharp devaluation, and ready to take all the baht-linked structured note investors down with it starting on July 2, 1997. So if the U.S. banks weren’t on top of the situation, how were the ratings agencies doing? According to Partnoy, they “…did not warn investors about the various financial problems in East Asia. In fact, both Moody’s and S&P continued to give a single “A” rating to the bonds of the government of Thailand for several months after the devaluation. Standard and Poor’s did not even put Thailand on its ‘credit watch’ until August, and did not downgrade Thailand’s credit rating until late October 1997.” ( Pages 248-249.)

The Raters’ Rank Within The Great Financial Chain of Being
So much for two big blown calls by the ratings agencies from the 1990’s. Let’s move ahead now to our current day financial disaster, caused in fair part by the mis-rated “AAA” subprime mortgage derivatives. The ratings’ agencies “rater” for this rave tour is none other than Michael Lewis himself, who despite his best efforts to de-romanticize the world of Wall Street, especially its bond salemen and CEO’s, nonetheless has managed to re-romanticize some hedge fund operators in his very worthwile and readable book about “The Doomsday Machine,” The Big Short. We’ve recommended it to you before, wondering outloud how anyone can continue to maintain the unqualified supremacy of the private financial markets after reading his books, but, that’s how it stands. We still set the equation like that because it’s some smart private hedge fund investors like Steven Eisman (and his researcher Vinnie Daniels), Michael Burry and Charlie Ledley who are figuring out what is dramatically wrong in the subprime world and about to collapse: before the ratings agencies, the SEC, the Federal Reserve and 99.9% of the economics profession even have a clue. (We have an explanation for institutional failure: these are dominated institutions, not dominant ones, held in an hidden emotional thrall, despite all their rational models and expections, by their shared romanticization of the “order of the entrepreneur,” especially its financial ones). Yet Lewis is still worth his weight in gold, even for Social Democrats like ourselves, because he gives the average citizen some priceless insights into the ranking of the great chain of being inside the financial world. We mentioned earlier, that logically, if one is guided only by logic, and by functionalism, there ought to be no more coveted job in the private sector than working as as a ratings’ agency analyst. But that’s not the way it is, as Vinny Daniels and Steve Eisman explain, and please notice too the grand hierarchical dichotomy, as always, between government and the private sector:

‘You know how when you walk into a post office you realize there is such a difference between a government employee and other people,’ said Vinny. ‘The ratings agency people were all like government employees.’… ‘They’re underpaid,’ said Eisman. ‘The smartest ones leave for Wall Street firms so they can help manipulate the companies they used to work for. There shold be no greater thing you can do as an analyst than to be the Moody’s analyst…Instead it’s the bottom! No one givesa f*** if Goldman likes General Electric paper. If Moody’s downgrades GE paper, it is a big deal. So why does the guy at Moody’s want to work at Goldman Sachs? The guy who is the bank analyst at Goldman Sachs should want to go to Moody’s . It should be that elite.’ (The Big Short, Page 156.)

Never Look Inside a Mortgage File Folder
It should be, but of course we know it isn’t and it couldn’t be, given the evolution of the American economy during the rise of the Right over the past 30 years. But it gets worse than this inversion of a supposedly logical hierarchy: we learn that “ ‘the ratings agencies didn’t really have their own CDO model,’” according to “one former Goldman CDO trader. ‘The banks would send over their own model to Moody’s and say ‘how does this look?’ Somehow, roughly 80 percent of what had been risky triple-B-rated bonds now looked like triple-A- rated bonds.” (Page 76.). Then there is a direct exchange with an S & P employee, Ernestine Warner, who worked, according to Eisman’s description, as an “analyst in the surveillance department.” Vinny and Eisman are trying to find out what the ratings agencies might know about the mortgage bonds and the derivatives built out of them - that they don’t: “‘We of course thought that the rating agencies had more data than we had,’ said Eisman. ‘They didn’t.’” When quizzed as to why the agencies didn’t have individual loan level details the answer from Warner is “ ‘The issuers won’t give it to us,’” the issuers, of course, being the Wall Street banks. So “Eisman concluded that ‘S&P was worried that if they demanded the data from Wall Street, Wall Street would just go to Moody’s for their ratings.’” (Pages 170-171).

At the bottom of the page which held that comment, there is a footnote from Lewis which zeroes in on exactly the same memo that we did when we first called your attention to the possibility of extensive fraud in the mortgage lending and derivative creation system, when we quoted William Black citing the very same item in his Feb. 25, 2009 article “The Two Documents Everyone Should Read to Better Understand the Crisis” (which appeared in our essay A Fireside Chat on the Cusp of History, March 29, 2009, and again on January 31st of this year, in 10 Million Foreclosures: No Saving Private Ryan This Time). Black and Lewis are quoting from an internal S&P Email from Richard Gugliada, the firm’s managing director of CDO ratings, sent in 2001 to Frank Raiter, a senior analyst who had requested more information about the original mortgage loan documentation. Gugliada wrote “ ‘any request for loan-level tapes is TOTALLY UNREASONABLE!!! Most originators don’t have it and can’t provide it…’” Now their two quotes differ only in one word: Black says investors where Lewis says originators…and as best we can judge from the original congressional hearing on October 22, 2008, it is investors, not originators. Raiter wrote back to Gugliada that “this was the most amazing memo I have ever received in my business career,” and his critical attitude got him demoted from S&P’s Executive Committee according to the account given here at http://www.pbs.org/now/shows/446/transcript.html, which is quite a good source because in addition to having Raiter and Gugliada in for interviews, it also has Joseph Stiglitz and Frank Partnoy.

The other document that Bill Black was referring to back in 2009 was a sample from the loan level “tapes” done in 2007 by the junior ratings firm, Fitch’s, and although it was a very limited sample here is what they found, with Black quoting from Fitch’s own report: “ ‘Fitch’s analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.’” (Our emphasis.) Those “full origination and servicing files” are very, very interesting documents, it would seem to us, and, we are sure, interesting to investors’ attorneys and anyone else considering suing the originators, the investment banks or the ratings agencies. But there was a firm that looked at 911,000 of them, just a 10% sample of the total subprime mortgage universe issued from January 2006 to June 2007, but which looked at them as the main “due diligence” firm for the Wall Street banks, and that would be Clayton Holdings. (If you want to see how much you missed during the fall 2010 election season about the history of the financial crisis, just try Googling Clayton Holdings, Keith Johnson and Vicki Beal. It was their former president, D. Keith Johnson, (and Beal, a then current Vice-President), who testified on September 23, 2010, in California, in front of the Financial Crisis Inquiry Commission, stating that he tried to interest the ratings firms in buying Clayton’s products which made sense of the findings, which, as you can imagine, contained the data which might have predicted a lot of trouble pending for the mortgage backed securities – and their “AAA”ratings.
A Case of Legally Toxic Evidence
So what we have here, citizens, isn’t just a case of toxic derivatives, it’s a case of toxic loan level tapes and potentially legally toxic evidence, and one of the big questions is, besides the samples from Fitch’s Ratings, what happened to the rest? Certainly the investors never got them, but they are very curious now; most of the originators have gone bankrupt, or passed their legal troubles on up the food chain, as with Countrywide to Bank of America. We’ve already quoted from a NJ trial about what Countrywide folks did or didn’t do with passing along key documents. But it was a long journey for these important papers from originators to the investment banks and their derivatives factories and then the trusts and CDO managers which later handled the bundled up mortgage investment packages…Perhaps not so surprisingly, the mortgage origination folder “avoidance problem” has been therefore mirrored by the great difficulties we’ve learned about in “foreclosuregate,” where it’s the mortgages and the linked notes themselves that are now missing or have been forged, as judges have been finding out.

Whistle Blowers and the American Dream
So Frank Raiter’s instincts at S&P were very sound when he wrote that the pushback memo against his request for more individual loan level details “was the most amazing memo I have ever received in my business career”; it was only 2001, but he had gotten it right and had Standard and Poor’s (and Clayton Holdings) blown the whistle institutionally then, called the already apparent odor for what it really was, the stink from a giant rotting fraud, then a great national tragedy, still playing out, might have been averted. But it would seem that we still have a hard time including “whistle blower” as a fully legitimate character in the casting call for the lead roles in “the American Dream,” because it still usually goes to someone from the school of entrepreneurial romanticism, like Angelo Mozilo, who rose from being the son of a butcher to helping butcher nearly an entire financial system, and collecting hundreds of millions for his effort, $521.5 million between 2000-2008, according to one accounting.

We have already mentioned several degrees of audacity involved with Standard and Poor’s decision to challenge the outlook on American sovereign debt on April 18th. We hope that what we have just written helps put our stance into clearer perspective. They were afraid to look too closely at what was really in those mortgage origination folders, or to challenge the Wall Street models, or to be interested in the evidence fairly dripping from Clayton’s due diligence folders, but now they’re ready to play the financial “sheriff” to put the notorious gov’mental debtor, Uncle Sam, in the conservative’s austerity jail on trumped up charges, as we will soon see in greater detail. But as we were doing some additional digging on the substantive details of this little essay, we realized that we ourselves had lost track of the congressional reform efforts directed at the failings of the ratings agencies, the approach that the Dodd-Frank legislation finally took to hold them more accountable. That’s how we stumbled upon the following.

Raters Recoil from “Expert Liability”
It comes from one of the regular financial reporters at the NY Times, Gretchen Morgenson, just a month ago, but with so little fanfare that we almost missed it entirely, until our recent search. She opens with a sigh of complaint that “it’s hard to say what’s more exasperating: the woeful performance of the credti ratings agencies during the recent mortgage securities boom or the failure to hold them accountable in the bust that followed.” But then she tells us that Congress - the Congress that couldn’t decide on a broader, more comprehensive reform of the agencies, such as changing their inherently flawed, dependent payment system or legislatively eliminating the SEC’s power to give them their legal reference role (the requirement to hold only “investment grade” rated paper, which they rate) in investment regulations – did pass something that had some real teeth: subjecting “the ratings agencies to what is known as expert liability under the securities laws…” opening them up to the same “lawsuits from investors” that “law firms and accoutants …have contended with for years” – and starting right from July 2010 for the very broad category of “assset-backed securities.”

And how did the agencies take the new form of legal pressure to take a closer look the next time at what those due dilligence efforts have turned up?: “The agencies responded by refusing to allow their ratings to be disclosed in asset-backed securities deals. As a result, the market for these instruments froze on July 22.” And how did the SEC take the boycott? They quickly caved in, issuing a “‘no action letter,’” thus removing “the expert-liability threat for the ratings agencies, and the market began operating again,” and then extending the stance in January, 2011, “indefinetly.” The result, Morgenson tells us, is that “issuers are selling asset-backed securities without the ratings disclosures required under SEC rules, and rating agencies are not subject ot expert liability.”

Now the rationale offered by the SEC – “ ‘that if we didn’t provide the no-action relief to issuers, then they would do their transactions in the unregistered market’” didn’t sit well with Morgenson and it doesn’t sit well with us either, continuing not only the old privileges of the ratings agencies, but also raising the question as to why the “unregistered market” was not brought under regulation. There was an attempt by Congressman Barney Frank to excuse the SEC’s inaction by noting that they are going to act, over time, to “eliminate investor reliance on ratings and remove, at long last, all references to credit ratings agencies in government statutes.” But the ultimate logic behind this direction, it seems to us, would be to not just reduce the stature of the credit raters, but to throw all market participants back upon their own due diligence efforts and the old standard, “buyers beware”: there would be no sactioned attempt at “objective” investment product ratings; in other words, it would be a completely laissez-faire world.

In fact, ratings agency reform, by itself, in the absence of much deeper financial reforms, (and those necessarily preceded by more sweeping political changes than those of 2008) seems more and more like a logical impossibility. Michael Lewis has just shown us that expecting the ratings agencies to perform as a sort of private sector “SEC” completely ignores the power structure within the private sector. But the SEC exhibits the same tendencies as well, the same deference to the same power realities: the great governmental “genuflection” to the awe and mystery of entrepreneurial romanticism, and therefore to perform due deference, not due diligence.

Speaking of Crime in the Suites

If there were any doubts about where we stand now on crime in the suites, consider Matt Taibbi’s account of a November 12, 2010 conference on financial law enforcement held at the Hilton Hotel in New York City…(from his “Why isn’t Wall Street in Jail” article, which appeared in the Feb. 16, 2011 edition of Rolling Stone, here online at
http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-2... . The circle of influence at the conference goes like this: right on through the revolving doors connecting senior SEC staff, the Justice Department and the major law firms which represent Wall Street clients. The speaker dropping the legal bombshell is Robert Khuzami, the SEC’s director of enforcement, speaking about a new “cooperation initiative” whereby “executives are being offered incentives to report fraud they have witnessed or committed….when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.” But, according to Taibbi, who is working from witness accounts as well as a transcript, it gets even more explicit: “ ‘We are going to try to get those individuals answers,’ Khuzami announced, as to ‘whether or not there is criminal interest in the case – so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client.’” Of course, such directions provoked incredulity from experienced observers of this triangle trade in “chumminess and mutual admiration that exists between these supposed adversaries of the justice system.” Apparently, even some Republicans can be embarrassed by such an advanced white collar forebearance system: “Earlier this month, when Sen. Chuck Grassley found out about Khuzami’s comments, he sent the SEC a letter noting that the agency’s own enforcement manual not only prohibits such ‘answer getting,’ it even bars the SEC from giving defendants the Justice Dpartment’s phone number.” Now we’re sure that under the cruel heel of the SEC, the ratings agencies are just all-a-tremble over what might be in store for them.

The Political Economy Behind the S&P Report
We began this essay with the S&P’s announcement of April 18, 2011, changing their “outlook” for the United States credit worthiness, based on their increasingly dim view of its debt and deficit situation. Then we gave you a tour of some of the major blown economic calls that they and the other ratings agencies have made, starting with Orange County in 1994, the Asian crisis of 1997, and culminating in their aversion to the loan level details of the mortgage derivative disaster of 2007...??? But since a good portion of the criticism of their earlier efforts centers upon the tensions between their income generating clients and the degree of due diligence applied to them and their offerings, we wouldn’t be fair to either them or ourselves if we didn’t in turn give our best “due diligence” effort in looking closely at their view of the political economy - as embedded in their seven page background report that accompanied the US credit announcement. And keep in mind this question as you follow along as we look at the words and concepts chosen by them – and also the ones they left out: was this announcement an act of courage, of audacity in the face of their diminished reputations, or a continued act of deference to the consensus views of the private economic powers which they have declined to challenge over the past two decades? If you would like to read their seven page PDF before reading our analyis, by all means do so here at http://www2.standardandpoors.com/spf/pdf/events/UnitedStatesofAmericaRat...

One way we go about excavating an embedded economic worldview is to start simply by looking at the repeated words and phrases, and none jump out as quickly on the very first pages of the S&P “Research Update” as do “flexibility and adaptability,” used some 7 times, and meant entirely to help explain why the U.S. has kept its “AAA” rating and “stable” outlook over the past years. They’re used to describe our labor markets, our revenue policy and our overall economy, and it goes hand-in-hand with our “efficient monetary policy,” which has supported “output growth while containing inflationary pressures,” and our openness to capital flows. By now our readers should know that these words, flexibility and efficiency, are part of the neo-liberal vocabulary and its informal subsidiary, the mainstream economics profession. These are words which are uttered in the same breadth as praise for “innovation,” as well as the free flow of capital, which are generally good things with caveats in order. But their silent corollary is usually the reality that “labor” and its representative institutions are submissive if not broken entirely, and their “flexibility” means that even in times of near depression, the principal economic tools will be the monetary policies of the Federal Reserve, and whatever else it deems necessary in the way of obscure creativity (like Quantitative Easing) to rescue the financial system and to try to restart the collapsed system of private lending. This worldview will also tolerate the policies of “we are all “Keynesians in the foxhole” – as long as the stay in that foxhole does not last more than a year or so. One of the clues about how touchy Keynesianism still is in a University of Chicago economics’ dominated world is that he is never mentioned in this report, nor is the word unemployed or unemployment, which is rather remarkable, don’t you think, given the current rate of 8.8%? Neither is the continued foreclosure crisis, the ongoing decline in housing prices, and indeed, the reality of a continued depression in the U.S. housing market.

In a bit of slick comparative shaming, we are told to look at the U.K., which suffered a drop in GDP nearly twice as bad as ours (“4.9% vs. 2.6%”) yet is embarked on a far more bracing course of austerity for the control of its public budget deficits (under the Conservative-Liberal Coalition government, a Right–Center joint venture), as is France. Unmentioned, revealingly, is the ongoing drop in the U.K.’s current growth rate, and the fact that U.S. firms made our workforce bear the burdens of cost-cutting far more severely than in the U.K., Germany or France. In regards to our “large external debtor position,” (that’s the trade deficit, primarily) the one James K. Galbraith says must result in either the public or private sector running an accounting deficit, S&P sees no troubles in the medium term, even with the ongoing dollar devaluation, because we are still enjoying a good measure of “external liquidity” due to the dollar’s still privileged international position. (Editors Note: Echoing the pattern in the U.K. and Ireland, the figures for the 1st quarter 2011 US GDP are in, and the growth rate fell from 3.1 percent in the last quarter of 2010 to only 1.8 %.)

To its credit, the report sees more trouble ahead for the U.S. financial sector and possible losses that will be made up on the back of the federal budget, and it also mentions the costs of dealing with troubles at Fannie and Freddie. But the troubles are not here attributed to the continuing deterioration in the value of those mortgage backed assets that Clayton Holdings wanted to call to the raters’ attention before the crisis became full blown, and the large number of mortgages that are currently underwater. Our sense is that in addition to the ones owned by Fannie and Freddie, some are still on the off-balance sheet vehicles of the major banks and some are sitting on the ledger sheets of the Federal Reserve. (The answers to how S&P handles the causality for the continuing troubles at the banks and Fannie and Freddy may be in other documents, but not in this one). But on two other matters they are very forthright and direct: that their ultimate value judgement is lasting “fiscal consolidation,” and that those “unfunded entitlement programs” are the “main source of long-term fiscal pressure.”

The audacity issue aside, the worldview expressed in this report is standard Right-Center analysis, both by what S&P chose to present as the nation’s most pressing problem, the federal debt/deficit situation - a view shared by Federal Reserve Chairman Bernanke (in his much commented on, first ever scheduled press conference, held on Wednesday, April 27, 2011) - and what it chose to ignore, the unemployment/foreclosure situation. Although the report only mentioned inflation once, worries about inflation are a given for those who want to make the federal debt-deficit issue the dominant concern, and it is still clearly the presiding worry of the Fed Chairman, despite all the faux tears on the unemployment rate, as Paul Krugman discusses in his “The Intimidated Fed” column from April 29, 2011.

Now while we usually agree with Krugman on general economic directions, we think he has made a tactical mistake, just as John Podesta at the Center for American Progress has, in believing that the U.S. Congress and the Obama Presidency could simultaneously deal with the unemployment/foreclosure crisis and also address the long-term budget deficit issues. Larry Summers also believed this was possible, and said so in an editorial in the Financial Times before he left government service. Given the balance of forces in the political economy between the Right-Center, and with a weak left, this was bound to result in moving deficit reduction to center stage while dropping the curtain to hide the still hemorrhaging wounds of the barely recovering economy. This also represents, with tragic consequences for the average citizen, the current balance of forces inside the economics profession itself. (Unfortunately, we agree with the April comment made by Lord Skidelsky, that it is apparent now that the recent financial crisis, as damaging as it has been, was not severe enough to displace the reigning neo-liberal paradigm.) So that’s why we have the following recommendations for our readers to help redress this balance.

Galbraith on Debt and Deficits…A Year Ago…
First, the best answer to the worldview expressed in the Standard and Poor’s seven page background report is economist James K. Galbraith’s eight page Statement to the Commission on Deficit Reduction from June 30, 2010, which you can find here at
http://www.ourfuture.org/report/2010062630/statement-commission-deficit-...

Here’s one of the most forceful portions of Galbraith’s powerful rebuttal of nearly all the assumptions behind the deficit hawks’ world view (and Galbraith has sparred, out of the limelight, with Krugman over these issues, and in our opinion, has gotten the better of the exchanges.):

Thus until the private financial sector is fully reformed – or supplemented by parallel financing institutions as was done in the New Deal – high deficits and a high public-debt-to-GDP ration are inevitable. In the limit, if there is no private financial recovery, debt-to-GDP will converge to some steady-state value, probably near 100 percent – a normal number in some countries – and at that point the public deficit will be the sole engine of new economic growth going forward. Only when the private sector steps up, will the debt-to-GDP ration begin to decline. For this reason, a Commission report focused on ‘entitlement reform’ rather than ‘financial reform’ would be entirely beside the point. Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction…Bringing about a rapid end to unemployment, caring properly for an aging population…coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits. (Our Emphasis.)

May Day Musings
Just in case this essay has not supplied our inquisitive readers with enough material to chew on until we can finish our “General Electric” piece, we want to share with you the links to the presentations made at two economic conferences held this April. The first was at Bretton Woods, New Hampshire, sponsored by the Institute for New Economic Thinking, here at http://ineteconomics.org/initiatives/conferences/bretton-woods/agenda .

And the second is on reforming the Federal Reserve, from the Roosevelt Institute here at
http://www.rooseveltinstitute.org/future-federal-reserve . Yves Smith has already picked out two of the presentations for us, and they are pretty good ones, from Thomas Palley, whom we’ve recommended to you repeatedly, and Tim Canova, who is new to us but has an eye-opener on what the Fed did, successfully, during the 1941-1951 period, here at
http://www.nakedcapitalism.com/2011/04/thomas-palley-on-how-to-fix-the-f...

It’s ironic how, given the claims that economics is a science, and a mathematically oriented one at that (see Larry Summers’ vast dismissal of different economic critics in his opening comments to Martin Wolf of the Financial Times at that Bretton Woods Conference), that the conventions of the field – and the apparent laws of nature – were so successfully suspended during wartime, and we would include the Civil War (as we hinted at in our last posting) and World War I in addition to World War II, so that an “alternative economics universe” could save the nation. Then it was back to the “normal” economy, where, no matter how bad things got, lessons learned during the war crises couldn’t be adequately adopted, with sufficient scale, to the mere human crises of tens of millions unemployed. Thomas Palley thankfully reminds us that the answer for the seeming riddle is an understanding of economics depending as much on political economy as on econometric equations.

Our take is that we now have competing attempts at emotional “mobilizations” – the “moral equivalents of war”: the Right is trying to build theirs around reducing the debt and deficits; the Left looks like it failed in 2008-2009 to build its response to unemployment, global warming and national industrial decline through the green collar, new energy economy, and its “Peoples Budget” has emerged late and is barking outside the fence of the debt-obsessed centrist, and controlling wing of the party. Ironically, the Right has not tried to mobilize the entire economy around the Iraq, Afghanistan and heaven knows where-else wars; instead, they publicly avoid any sense that there might be widespread negative economic ramifications from them, while silently drawing on the usual stream of military Keynesianism. They also deny the need for war related sacrifices, except from the troops; least of all the need for revenue policies to pay for them.

Summers, who despite being wrapped in his cautious “mode,” still strikes us as being descended from the powder-wigged, imperious economic ministers of 18th century England, or better yet, mid-18th century France (although he is hardly in the reforming tradition of the French ones.) This is very much the same reaction we used to have to the stage presence of the late Louis Rukeyser, host of Wall Street Week from 1970-2002, a show that was rooted in Maryland Public Television, and originated in Owings Mills. Mr. Rukeyser did many things on his show to try to help the average investor, but one thing he certainly did not do, and just look at those years mapped against the rise and fall of how many Wall Street predators, was teach them about “political economy” – and maybe that helps explain a bit about how Maryland still works today. Labor never did have even a once-a-month show, and the very silliness of that notion tells you a lot about our society during those years (see Jefferson Cowie’s Stayin’ Alive: The 1970’s and the Last Days of the Working Class, which we learned about from his epitaph-like Labor Day Op-Ed in the New York Times from last September…)

Thinking about Larry Summers and his world also reminds us of one historian’s comment about French Society in the second half of the 18th century, where one could imagine a giant reception line stretching across the entire nation, beginning in the countryside but always funneling and narrowing towards one destination, the Court at Versailles, and increasing proximity to the king’s inner circle. Today, it’s access to the court of economic ideas, which Summers is ferocious in patrolling, even though he’s no longer in the White House. Here’s James Galbraith with a recent interview on how the academic economic pecking order works. http://ineteconomics.org/video/conference-kings/politics-and-sociology-e...

Unfortunately, the funneling and narrowing process seems to be echoed in the Jim Messina screened Common Purpose Project of the Obama administration, “coveted invite-only, off-the-record Tuesday meetings at the Capitol Hilton” for progressive groups described in Ari Berman’s article “The Enforcer,” in the April 18th print edition of The Nation; this CPP sounds like it operates the way much of the Beltway’s other “reception lines” do…

Near the end of the Summers-Wolf video, in his own elliptical way, if one listens carefully, Professor Summers sounds like he is not entirely sure that the current austerity hysteria bodes well: “ ‘I find the idea of expansionary fiscal contraction in the context of the world in which we now live to be every bit as oxymoronic as it sounds.’” He also seems to have noticed that there is just a slight disconnect between “economic output levels and employment,” something which we as non-econometric observers have been calling to your attention for more than three years now – and others for much longer. {Professor Summers, here is the “equation” we used to get there: A-Greider + B-Rifkin + C-Kuttner +D-Polanyi + E-Sennett + F-Gray + G-Harvey + H-Phillips + I-Uchitelle + J-Ehrenreich + K-Brinkley +L-Cowie + M-Palley +N-Braudel …. = full employment (someday)}.

He also noticed that there is a modeling problem, a paradox to consider in the faltering attempts at regulatory reform – “regulators have not done a good job” – and that those with the requisite knowledge to be good regulators are bound to have developed “interests”; one can’t be knowledgeable and “un-co-opted” at the same time, a view which seems to us to be an even more cynical worldview than that which says that all cops are on the take. In Summers view, apparently, all the able regulators are cops on the make – a very understandable outcome, we think, in a society suffering from the compression of role models under the atmospheric pressure of entrepreneurial romanticism, where it’s always time to leverage those insights to the max, rather than protect a mere public interest.

And it’s from observations like this that we “deduce” that it’s not better equations or bigger brains alone that will get us to the full employment that all our citizens are due - it’s bigger hearts.

Therefore, in our dream Summers panel, he would be invited to sit alongside, and talk equitably with, Matt Taibbi and AFL-CIO head Richard Trumka, and perhaps James Galbraith, although Thomas Palley would also do nicely, as would Lord Skidelsky, an almost famous non-econometrician… Oh the indignities to Mr. Summers from even thinking of such tiresome arrangements…

Until our next post, all the best to our readers…

Bill Neil
Rockville, MD

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future